Correlation Is Not Causation

by Andrew Stuttaford

When class war gets going, it accelerates pretty quickly. Paul Krugman waxes just a little too nostalgic for a 91 percent top tax rate here:

Yet in the 1950s incomes in the top bracket faced a marginal tax rate of 91, that’s right, 91 percent, while taxes on corporate profits were twice as large, relative to national income, as in recent years. The best estimates suggest that circa 1960 the top 0.01 percent of Americans paid an effective federal tax rate of more than 70 percent, twice what they pay today.

Nor were high taxes the only burden wealthy businessmen had to bear. They also faced a labor force with a degree of bargaining power hard to imagine today. In 1955 roughly a third of American workers were union members. In the biggest companies, management and labor bargained as equals, so much so that it was common to talk about corporations serving an array of “stakeholders” as opposed to merely serving stockholders.

Squeezed between high taxes and empowered workers, executives were relatively impoverished by the standards of either earlier or later generations. In 1955 Fortune magazine published an essay, “How top executives live,” which emphasized how modest their lifestyles had become compared with days of yore. The vast mansions, armies of servants, and huge yachts of the 1920s were no more; by 1955 the typical executive, Fortune claimed, lived in a smallish suburban house, relied on part-time help and skippered his own relatively small boat….

…Strange to say, however, the oppressed executives Fortune portrayed in 1955 didn’t go Galt and deprive the nation of their talents. On the contrary, if Fortune is to be believed, they were working harder than ever. And the high-tax, strong-union decades after World War II were in fact marked by spectacular, widely shared economic growth: nothing before or since has matched the doubling of median family income between 1947 and 1973.

The suggestion  that the U.S. flourished because of those confiscatory rates (much more easily circumvented than they would be today, incidentally, at least so far as individuals would be concerned) is ludicrous. The fact that much of the rest of the planet was recovering from the destruction of World War II, and thus was a keen, needy customer rather than a brutal competitor throughout this period might just possibly been of some relevance to that great wave of prosperity.

But if we are going to look at the question of inequality, it might be worth asking if the mass immigration of the last four decades might have had something to do with the failure of incomes to keep up. Labor, after all, is not immune to the laws of supply and demand.

Here’s what someone (I’ll give you a clue: he’s a Nobel laureate, he writes for the New York Times and his last name begins with a K) had to say on this topic back in 2006:

[I]mmigration reduces the wages of domestic workers who compete with immigrants. That’s just supply and demand: we’re talking about large increases in the number of low-skill workers relative to other inputs into production, so it’s inevitable that this means a fall in wages. Mr. Borjas and Mr. Katz have to go through a lot of number-crunching to turn that general proposition into specific estimates of the wage impact, but the general point seems impossible to deny . . .

Indeed it is.